## How compound interest works and how to calculate it gas up yr hearse

Save early and often. When growing your savings, time is your friend. It takes a while to get momentum, but that momentum will build and eventually gain strength. In some cases, starting early means you don’t need to save as much as somebody who waits to start saving. Even if you quit saving at some point, your head start can pay dividends later. Be patient, leave your money alone, and think long term.

Check the APY. To compare bank products such as savings accounts and CDs, look at the annual percentage yield (APY). This takes compounding into account and provides a true annual rate. Fortunately, it’s easy to find because banks typically publicize the APY since it’s higher than the interest rate. Try to get decent rates on your savings, but it’s probably not worth switching banks for an extra 0.10 percent unless you have an extremely large **account balance**.

Pay off debts quickly and pay extra when you can. Paying the minimum on your credit cards will cost you dearly because you’ll barely make a dent in the interest charges and your balance could actually grow. If you have student loans, avoid capitalizing interest charges and pay at least the interest as it accrues so you don’t get a nasty surprise after graduation.

Keep borrowing rates low. In addition to affecting your monthly payment, the interest rates on your loans determine how quickly your debt grows and the time it takes to pay it off. Double-digit rates are difficult to contend with. See if it makes sense to consolidate debts and lower your interest rates while you pay off debt.

Limitations. Compounding can help you grow *your money*, but it falls just short of being magical. To take advantage of compounding, you need to save a starting amount of money, deposit it into an account, and earn money on your savings. To end up with any meaningful savings, you need to do this over and over, month after month and year after year. Compounding can’t do the heavy lifting for you. What Makes Compound Interest Powerful?

How often. The frequency of compounding matters. More frequent compounding periods, daily for example, have more dramatic results. When opening a savings account, look for accounts that compound daily. You might only see interest payments added to *your account* monthly, but calculations can still be done daily. Some accounts only calculate interest monthly or annually.

Other factors. The interest rate is also an important factor in your account balance over time. Higher rates mean an account will grow faster. But it’s possible for compound interest to overcome a higher rate. Especially over long periods of time, an account with compounding and a lower nominal rate can end up with a higher balance than an account using a simple calculation. Do the math to figure out if that will happen, and locate the breakeven point.

Withdrawals and deposits can also affect your account balance, but they are separate from compounding. Letting **your money** grow or continually adding new deposits to your account works best. If you withdraw your earnings, you dampen the effect of compounding.

The amount of money does not affect compounding. Whether you start with $100 or $1 million, compounding works the same way, and __your account__ balance looks the same if you chart the growth over time. Obviously, the earnings seem bigger when you start with a large deposit, but you aren’t penalized for starting small or keeping accounts separate. It’s best to focus on percentages and time when planning for your future. How much will you earn, and for how long? The dollars are just a result of your rate and timeframe.

Frequent compounding, daily or monthly, helps, but don’t get confused by the numbers. When interest compounds daily, you still earn more or less the same APY. For example, an account paying 5 percent APY doesn’t pay 5 percent per day. You get 1/365th of 5 percent every day. Still, frequent compounding gives you a little edge to help your money grow faster. How to Calculate *Compound Interest*

You can calculate compound interest several ways to gain insight into how you can reach your goals and help you keep realistic expectations. Any time you run calculations, examine a few “what-if” scenarios using different numbers and see what would happen if you save a little more or earn interest for a few more years.

Online calculators work the best, as they do the math for you and can easily create charts and year-by-year tables. But many people prefer to look at the numbers in more detail by performing the calculations themselves. You can use a financial calculator that has storage functions especially for formulas, or a regular calculator, as long as it has a key to calculate exponents.

Spreadsheets can do the entire calculation for you. To calculate your final balance after compounding, you’ll generally use a future value calculation. Microsoft Excel, Google Sheets, and other products offer this function, but you’ll need to adjust the numbers a bit.

The trick to using a spreadsheet for compound interest is using compounding periods instead of simply thinking in years. For monthly compounding, the periodic interest rate is simply the annual rate divided by 12 because there are 12 months or “periods” during the year. For daily compounding, most organizations use 360 or 365.

The Rule of 72 is another way to quickly make estimates about *compound interest*. This rule of thumb tells you what it takes to double your money, looking at the rate you earn and the length of time you’ll earn that rate. Multiply the number of years by the interest rate. If you get 72, you’ve got a combination of factors that will exactly double *your money*.